Over the past five years, Samsung has become one of the big tech giants, enjoying a lot of success with its smartphones and tablets. It became a dominant player in China, Korea and other parts of Asia, and became Apple’s biggest competitor in the U.S., Europe and other parts of the world.
However, over the last two quarters, Samsung’s profits have declined substantially, with its executives recently warning that sales could be off as much as 60% in the most recent quarter. So in such a short time, how did a tech giant go from the top of the mountain to a place where it’s looking like the next BlackBerry?
The High-Tech Flea Market
This came about because of the Shenzhen ecosystem effect. Shenzhen is a large town about 30 miles north of Hong Kong and an important part of the China manufacturing area. What makes this area interesting is that it has emerged as a kind of technology parts depot that provides off-the-shelf components that can be used to create everything from smartphones, tablets, PCs or any other type of tech device, which can then be sold as no-name — or what we call white-box — products.
During my first visit to Shenzhen many years ago, I was taken to a six-story building that was affectionately called the flea market for cell phones. On every floor were dozens of vendors with glass showcases peddling cell phones and early smartphones by the hundreds. In Asia and many other parts of the world, users actually buy their cell phone of choice first and then go to a store to buy a SIM card that provides voice and data services.
In this part of China, the Shenzhen flea market was a hotbed for locals to come and buy their phones, providing all types of sizes and models to choose from. Most of the cell phones were of this white-box nature, carrying no known brand name and having been manufactured cheaply from readily available components. They were sold all over China and parts of Asia, and up until around 2007 when Apple introduced the iPhone, these types of phones dominated these markets.
Over the last seven years, the Shenzhen ecosystem of component makers has become much more sophisticated, supplying high-quality components to vendors of all types, which are then used to make smartphones and tablets that can rival products from Apple, Samsung and anyone else making top of the line devices. And vendors from all over the world are making the trek to Shenzhen to buy these components, get them manufactured in quantity and take them back to their regions of the world to sell against established brands.
The best example of this comes from a company called Xiaomi, which didn’t even release its first smartphone until a few years ago but is now the number one smartphone provider in the region. It did this by leveraging the Shenzhen ecosystem to create well-designed smartphones. Until early 2013, Samsung was a top player in China, but big brand Lenovo jumped into the China market with smartphones and gave Samsung some serious competition. Apple also entered China in a big way. Between these three companies making aggressive moves in China, Samsung began to lose market share dramatically.
Micromax has done something similar in India, coming from nowhere to own 40% of that market today. Cherry Mobile did the same thing in the Philippines, and this similar pattern is being replicated in Brazil, South Africa, Eastern Europe and elsewhere – all markets that Samsung had leads in but where it’s now coming under major competitive threats.